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Friday, August 22, 2008

UK Economy Stands Still In Q2, Weakest Since 1992

Source : The Business Times, August 22, 2008

LONDON - Britain's economy failed to expand in the second quarter of this year for the first time since the slump of the early 1990s and reinforcing expectations interest rates will have to fall to avoid a painful recession.

The Office for National Statistics revised down its GDP reading to show it was unchanged on the quarter in the three months to June from an initial estimate of 0.2 per cent growth and down from 0.3 per cent growth in the first quarter.

That larger-than-expected revision was the lowest reading since the second quarter of 1992 when the economy was in the throes of its last recession. On the year, GDP was just 1.4 per cent higher, the weakest since the final quarter of 1992.

Sterling and the FTSE 100 index of leading British shares fell and interest rate futures rose after the data boosted expectations that borrowing costs will need to fall to prevent a deep and protracted slowdown.

'This really does put a rate cut firmly on the agenda although it is unlikely to come until we have seen the peak in inflation,' said Brian Hillard, an economist at Societe Generale.

The Bank of England is already factoring in the economy standing still over the next year and has said growth needs to slow to tame inflation, which is running at more than double the central bank's 2 per cent target and expected to spike higher.

The figures are likely to fan further criticism of Prime Minister Gordon Brown's handling of the economy. He will no longer be able to boast of the economy growing continuously since the Labour government came to power in 1997.

But the government is likely to point out high oil prices and a credit crunch are hurting economies right across the world. The euro zone economy contracted in the second quarter.

The downward revisions to the preliminary estimate of British GDP were across the board. Britain's dominant services sector grew by just 0.2 per cent on the quarter, its poorest showing since the fourth quarter of 1995.

Manufacturing output fell by 0.8 per cent on the quarter, the weakest since the first quarter of 2005. Construction output, which has been hard hit by the housing market slump, fell by 1.1 per cent on the quarter - the worst since Q3 2005.

Household spending fell 0.1 per cent on the quarter, its weakest since the second quarter of 2005.

However, policymakers have said they expect a weaker pound to boost exports, helping to rebalance - and bolster - the economy. Net trade contributed 0.3 percentage points to the Q2 reading and government spending also lent some support. -- REUTERS